And so the crisis ends - not with a bang but a whimper

And so the crisis ends - not with a bang but a whimper
JACOB SAULWICK
August 31, 2009
MONDAY COMMENT

Where is all the outrage? In the coming month we hit the one-year anniversary of the most frenetic weeks of the financial crisis, fast days when it seemed like some sniper from above was picking off the big names of banking - Lehman Brothers, AIG, Merrill Lynch - and governments were scrambling to salve the wounds of the system with big swabs of public money.

Even then, amid the fear, there seemed a sense that this crisis represented an opportunity to make the world a better place. Whether motivated by schadenfreude or optimism, there was a feeling - in respectable circles and out - that the comeuppance of the bankers was kind of a good thing. That greed had got out of hand, and now there was a chance to start again and draw up a fairer, more stable, more just kind of capitalism.

A year on, and it looks like the financial crisis is passing and little will have really changed. Banks have gone back to making money. Unemployment is higher but not dramatically so. And apart from new school buildings and some extra home insulation, there is a good chance that the next decade in Australia will look a lot like the previous one.

How did this happen? We were told that it was the biggest economic calamity since the Great Depression. Yet it is remarkable how quickly conditions appear to have improved. And it is remarkable how little unrest there has been, despite the crisis seeming to have been caused by the upper echelons of finance, and inflicting greatest pain on those at the bottom.

About 2000, remember, whenever world leaders got together they were met with storms of hostility and protest. The so-called anti-globalisation movement had a head of steam. But this year and last, when there was a genuine crisis to deal with, the streets have mostly stayed quiet.

I believe there are two reasons the financial crisis may end with a whimper. The first is that governments have done much better than anybody expected in firming up the economy. The quip by Barack Obama's chief of staff, Rahm Emanuel, that you don't want to waste a good crisis is only half-true. For governments, crises are above all about ensuring stability and preserving the status quo.

And it is remarkable what they have done. Adjusted for inflation, the cost of the US banking bail-out, according to Barry Ritholtz, is more than what was spent on the Marshall Plan, the Louisiana Purchase, the moon race, the savings and loan crisis, the Korean War, the New Deal, the invasion of Iraq, NASA, and the Vietnam War put together. That has to have some impact.

When the panic is on, governments do what they can to patch things up. It is not necessarily a good time to force change.

But the rhetoric around the financial crisis has also become deflated, I think, because so much of the early criticism was populist and moralising, and therefore pointless. Greedy bankers, the critics said, were getting their just deserts. Finance had been out of control for too long and now was the time to rein in the capitalism of the casino.

But this kind of talk can only take you so far. There is little use in lambasting greed in the banking system. There have always been greedy bankers, but there have always been greedy bakers as well. What are you going to do about it?

The anti-banker populism that swelled last year was mostly silent on the concrete steps you might want to take to ensure financial tremors do not lead to economic misery. It had little to say about how you might keep credit flowing - giving businesses and home buyers the chance to take out loans - but cut systemic risks out of the financial system.

And as anti-banker populism flares, politicians have little trouble aligning themselves to it. John Howard and Peter Costello would frequently express their unease at Macquarie-level salaries. Kevin Rudd milked the initial outrage for all it was worth, railing against extreme capitalism and the neo-liberal bogeyman. And when the economy picks up, as it now appears to be doing, bankers start making money again and shrill cries of greed become a memory.

The financial crisis claimed the scalps of a few bankers, but, a year on, it also represented something of a defeat for the anti-globalisation, anti-finance types. Last year they got their crisis, but insomuch as their only critique was anti-banker sloganeering, they were outflanked by Rudd and co, who were just as comfortable with this type of rhetoric.

The result, after the heaviest government intervention in history, is that the crisis is easing. But that is a long way from the talk of a new world order that was floating around only a year ago.